Confirmatory research of Minsky’s financial instability hypothesis for the 1945-2017 era



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The field of Engineering Economics often involves the application of economic principles to analyze and formulate decisions regarding the economic viability of the technical solution. These decisions often rely on the knowledge of future economic conditions to evaluate risk and establish the economic equivalence for various outcomes. Following the Financial Crisis of 2008, a historical financial theory developed by American economist, Hyman Minsky, emerged as a prominent theory that can explain the root cause of all historical business cycles occurred after World War II. This theory was known as the Financial Instability Hypothesis (FIH). If such theory holds true, its application could be used to forecast future business cycles to improve engineering economic decisions. However, the current literature shows a lack of proper methodology to confirm whether this theory is valid and can be used to analyze the current economic conditions. Thus, this research developed a methodology to first validate this financial theory and used it to evaluate the current economic environment. This research analyzed eleven financial debt ratios related to the level of debt associated to the U.S. households, nonfinancial and financial businesses. The validation process utilized nonparametric statistical analysis of Page and binomial tests to provide statistical evidences that supported the validity of FIH. This confirmatory research found evidence to suggest FIH concepts were indeed applicable to the 1945-1980s era and remained relevant to the 1990-2017 periods. This result showed that the research methodology developed can be used as an application of FIH theory to evaluate the current economic conditions for potential economic threats and formulate engineering economic decisions accordingly.



Financial Crisis, Financial Instability Hypothesis, Minsky, Hyman, Page test